5-1
1
ACT 5-2
a.
Robin Co.
Goods Available for Sale
Beginning Inventory
100
@
$50
=
$ 5,000
70
@
55
=
3,850
First Purchase
100
@
54
=
5,400
Second Purchase
250
@
58
=
14,500
Total
520
$28,750
FIFO
Cost of Goods Sold:
FIFO
Units
Cost per
Unit
Cost of Goods
Sold
From Beginning Inventory
100
@
$50
=
$ 5,000
From Beginning Inventory
70
@
55
=
3,850
From First Purchase
100
@
54
=
5,400
From Second Purchase
150
@
58
=
8,700
Total
420
$22,950
Ending Inventory: 100 units @ $58 = $5,800
LIFO
Cost of Goods Sold:
LIFO
Units
Cost per
Unit
Cost of Goods
Sold
From Second Purchase
250
@
$58
=
$14,500
From First Purchase
100
@
54
=
5,400
From Beginning Inventory
70
@
55
=
3,850
Total
420
$23,750
Ending Inventory: 100 units @ $50 = $5,000
ATC 5-2 a. (cont.)
Weighted Average
Total Cost
Total Units
=
Cost per Unit
$28,750
520
=
$55.288
5-2
2
Cost of Goods Sold
420 units
@
$55.288
=
$23,221
Ending Inventory
100 units
@
$55.288
=
$5,529
Robin Co.
Income Statements
FIFO
LIFO
Weighted
Average
Sales (220 @$80; 200 @ $90)
$35,600
$35,600
$35,600
Cost of Goods Sold
(22,950)
(23,750)
(23,221)
Gross Margin
12,650
11,850
12,379
Operating Expenses
(3,200)
(3,200)
(3,200)
Income Before Tax
9,450
8,650
9,179
Income Tax (30%)
(2,835)
(2,595)
(2,754)
Net Income
$6,615
$6,055
$6,425
b. LIFO may be preferred for tax purposes in a period of rising prices because it will result in the
lowest net income and, consequently, the lowest amount of tax paid for the year. Since the last
items purchased, (the most expensive) are the items expensed on the income statement, the
if it is
c.
ATC 5-2 a. (cont.)
used for tax reporting. However, it must also be used for financial statement purposes to prevent
abuse by taxpayers.ATC 5-3
All dollar amounts are in millions.
5-3
3
Whirlpool: Receivables ÷ Revenues = %
b. Whirlpool, whose accounts receivables balance is 11.2% of its sales, appears to be making
c. Starbucks sells its products to retail customers who usually pay with cash or credit cards.
a.
Factors Paul Smith should consider before allowing credit sales:
1. The cash flow: Can he finance his inventory while the accounts are outstanding?
b. The memo should contain a discussion of the factors listed above. It should also contain a
ATC 5-5
a. Net income is artificially inflated because of the failure to properly recognize bad debt
b. Article I (responsibilities) of the AICPA Code of Professional Conduct requires members to
carry out their responsibilities with sensitive professional and moral judgment. Further,
c. The three elements of the fraud triangle are:
5-4
4
Rationalization – Saunders’ company is thriving, therefore, he has every reason to believe
that repayment of the loan will not be a problem. He further reasons that since there is no